In its case against Citigroup, the SEC claimed the bank misled investors in 2007 when it allegedly stuffed a $1 billion mortgage fund with securities that were likely to fail in order to profit from its customers when values declined. When the SEC and Citigroup approached Judge Rakoff with a proposed $285 million settlement to resolve the allegations, he squarely rejected it, saying the deal didn’t reflect whether it was “fair, reasonable, adequate and in the public interest,” and that the settlement amount was “pocket change to any entity as large as Citigroup.”

“The court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country,” Khuzami said in a statement. “In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.”

Yesterday, the SEC again blasted Judge Rakoff’s Citigroup decision in a court filing defending the agency’s proposed settlement with stereo headphone manufacturer Koss Corp., which is accused of making inaccurate financial statements from 2005 to 2009.

“The commission respectfully submits that the district court in SEC v. Citigroup Global Mkt. erred in adding the requirement that a reviewing court also find such judgments to be in the public interest,” SEC attorney Andrea Wood said in yesterday’s filing. “Nonetheless, in this case, the proposed consent judgments are in the public interest, as well as being fair, adequate and reasonable and therefore satisfy the Citigroup standard.”

Like Citigroup, Koss and its executives have not admitted or denied the SEC’s claims. The proposed agreement would call for CEO Michael Koss to forfeit $450,000 and 160,000 options, the equivalent of his incentive bonuses in 2008 through 2010. However, Milwaukee District Judge Rudolph Randa has been critical of whether or not the SEC will be able to enforce a vague provision in the proposed Koss settlement that requires the company to promise not to violate securities laws in the future.